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October 13, 2014

Two really rather good articles caught my eye over the past several days – both discussing whether it is illegal under antitrust laws to merely be big. The first, by Gordon Crovitz in the Wall Street Journal, discusses Peter Thiel’s view (co-founder of PayPal, first Facebook investor) that “creative monopolies” are not only good but in fact what every entrepreneur should aspire to (see: Three Cheers for ‘Creative Monopolies’). More specifically, Thiel argues that the most successful companies create unique products not commodities: “[a]ll happy companies are different: each one earns a monopoly by solving a unique problem. … failed companies are the same: they failed to escape competition.”

Thiel further distinguishes between firms that merely achieve significant size on the one hand from conduct that may attract antitrust scrutiny on the other – i.e., contrasting “illegal bullies or government favorites” from “creative monopolies [that] give customers more choices by adding entirely new categories of abundance to the world.”

In the second article, published last Friday in Vox, Matthew Yglesias wrote a rebuttal to a New Republic piece by Frank Foer in which he argues that “Amazon Must Be Stopped”. The New Republic piece labels Amazon a monopoly and argues for state-interventionist solutions – for example, “stripping Amazon of the power to set prices” or “depriving it of the ability to use its site to punish recalcitrant suppliers”. In support of his argument, Mr. Foer points to a number of claimed monopolistic acts engaged in by Amazon that include “undercutting competitors”, “squeezing suppliers” and by suggesting that Amazon, like the proto-giant retailer Walmart, has driven out small retailers (in Mr. Foer’s phraseology: “old department stores and grocers”).

The trouble, however, with Mr. Foer’s article, as I think is skillfully pointed out in the Yglesias Vox rebuttal, is that most of Amazon’s criticized conduct sounds like merely a successful firm that innovated and distinguished itself from its lockstep competition – lower prices, greater choice and efforts to make suppliers more efficient.  Don’t consumers want lower prices and more choice?

Now of course it may be that Amazon’s conduct is sufficient (or may be at some point) to trigger antitrust censure – for example, significantly diminishing competition among publishers or authors to the extent that it actually does violate antitrust laws.  However, that does not naturally flow from mere size, low prices or eliminating some traditional retailers.  Competition is, of course, meant to be brutal to some extent.

What both articles illustrate well is the distinction between firms that are merely large and those that are large and engage in conduct that is (or should be) subject to antitrust/competition law scrutiny. Or, as put in the Justice Scalia quote in the Wall Street Journal article:

“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful, it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.”

Though trite to competition lawyers (i.e., that it is size and anti-competitive acts that comprise an illegal antitrust monopoly or, in Canada, abuse of dominance), this distinction seems lost or blurred by some mainstream writers and commentators. This difference – i.e., between mere significant market presence and market presence and some “bad” conduct from the perspective of competition/antitrust law – is also one I frequently discuss with clients and prospective clients looking for strategies to challenge large incumbents.

This not infrequent confusion – i.e., between firms that simply have large market share and those that have large market share and are engaging in conduct that should attract competition/antitrust enforcement – is similar to errors sometimes made in the intellectual property area (i.e., confusing, for example, a patent monopoly with IP monopoly holders that engage in activities that may violate the antitrust laws, such as in the pay-for-delay context in some instances, an IP monopoly holder that engages in tying, etc.).

In the first case a firm holds a statutory monopoly, which is precisely what legislation and policy is meant to achieve – i.e., a limited (in time) protection to encourage innovation.  In the latter examples (of course there are many more) a holder of an IP monopoly does something more to further limit competition, which may attract competition/antitrust enforcement.

To put it at its perhaps simplest: all monopolies are not competition/antitrust monopolies.

So what then is a monopoly in competition/antitrust law terms? That can be a very long conversation, given, among other things, the economics involved in unilateral cases (e.g., market definition, evaluation of market effects, etc.), types of activities that can potentially attract competition/antitrust scrutiny and the characteristics of a particular market at issue.

In a nutshell, however, at least in Canada, three things are required: first, dominance (i.e., market power); second, a practice of anti-competitive acts; and third, a prevention or substantial lessening of competition.

So in addition to market power (i.e., mere size, which is the focus of the above two articles), it is also necessary to establish that a dominant firm has engaged in some form of conduct that has substantially reduced competition – reduced competition to a degree that a remedy is appropriate to correct the distortion.

In economic terms, such conduct often falls within a handful of main categories: predation (e.g., below cost pricing to eliminate competition); exclusionary conduct (e.g., long term exclusive supply or distribution agreements that foreclose competitors from access to suppliers/customers); or raising a rival’s costs (e.g., dual-distribution arrangements that squeeze a rival’s costs, strategic litigation, etc.).

In Canada, there is both a statutory list of anti-competitive conduct under section 78 of the Competition Act and others that have been established by Canada’s Competition Tribunal.  Of course in Canada, like many other jurisdictions, the line between healthy competition and “anti-competitive acts” is a notoriously difficult one for both enforcers and courts to draw.

What is not sufficient, however, is that a company is merely large or has acquired most or all of the market share in a particular market – that is, after all, precisely what all companies are encouraged to strive to do. So in sum, is it illegal in Canada to merely be big? I’m afraid not (and I suspect the same is true in most other major jurisdictions).

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